La-Z-Boy (LZB)

Q1 2012 Earnings Call

August 24, 2011 8:30 am ET

Executives

Kathy Liebmann - Director of Investor Relations and Corporate Communications

Louis Riccio - Chief Financial officer and Senior Vice President

Kurt Darrow - Chief Executive Officer, President and Executive Director

Analysts

Chad Bolen - Raymond James

Bradley Thomas - KeyBanc Capital Markets Inc.

Todd Schwartzman - Sidoti & Company, LLC

Matthew McCall - BB&T Capital Markets

Presentation

Operator

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Good morning, ladies and gentlemen. Welcome to the La-Z-Boy Fiscal 2012 First Quarter Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce Ms. Kathy Liebmann, Director of Investor Relations of La-Z-Boy Inc. Ms. Liebmann, you may begin.

Kathy Liebmann

Thank you, Jackie. Good morning, everyone, and thank you for joining us to discuss our fiscal 2012 first quarter results. Present on the call are Kurt Darrow, La-Z-Boy's President and Chief Executive Officer; and Mike Riccio, our Chief Financial Officer. Kurt will begin today's call and then Mike will speak about the financials before turning the call back to Kurt for his concluding remarks. We will then open the call to questions.

A telephone replay of the call will be available for one week beginning this afternoon. These regular, quarterly investor conference calls are one of La-Z-Boy's primary vehicles to communicate with investors about the company's current operations and future prospects.

We will make forward-looking statements during this call, so I will repeat our usual Safe Harbor remark. While these statements reflect the best judgment of management at the present time, they are subject to numerous future risks and uncertainties, as detailed in our regular SEC filings. And they may differ materially from our actual results due to a wide range of factors. We undertake no obligation to update any forward-looking statements made during this call.

And with that, let me turn over the call to Kurt Darrow, La-Z-Boy's President and Chief Executive Officer. Kurt?

Kurt Darrow

Thank you, Kathy. Good morning, everyone. Yesterday afternoon, we reported our first quarter results for fiscal 2012. We posted a 6.4% consolidated sales increase for the quarter, a 9.7% same-store sales comp for the La-Z-Boy Furniture Galleries network of stores and a delivered sales comp of 10.4% in our company-owned retail segment for the 68 stores we had in last year's first quarter. We also continued to make progress in our retail segment, marking the 10th consecutive quarter of improved performance. And importantly, excluding the valuation reserve reduction, we improved our operating income by more than $5 million in fiscal 2012 first quarter versus last year's first quarter.

Given the first quarter is typically our slowest volume period due to seasonality issues associated with the summer months, overall, we are encouraged by these numbers. It goes without saying, however, that the volatility pervading in the financial market is unsettling to the consumer, and we remain cautious given the macro economic environment. Against that backdrop, we are continuing to work to drive traffic to the store system, while at the same time working to further improve the efficiencies of our various operations to ensure profitability.

As we move into the fall, which is typically a stronger selling season for furniture, we believe we are well positioned to improve our performance by leveraging the lean operating platform we have created. Additionally, our balance sheet remains strong, our service position is excellent and we continue to be pleased with our new brand platform and marketing campaign.

On the upholstery side of the business, sales increased 7.7% to $217 million versus last year's first quarter, and our operating margin increased slightly to 5.1%. Our Mexico-based cut-and-sew facility continues to improve its efficiencies and is delivering results, although the level of savings this quarter was impacted by a negative currency adjustment due to the peso devaluation. Additionally, our new advertising campaign featuring Brooke Shields continues to drive qualified traffic to our stores and dealer base, and we have seen a lift in our web traffic as well. Our margin for the quarter, however, was impacted by a slight shift in our sales mix when we saw consumers demonstrate more caution, slightly modifying their buying habits and purchasing fewer higher-priced items. For the period, the composition of sales was more heavily weighted to major upholstery and stationary items rather than the more expensive leathers and our core recliner product where we generate a better gross margin. During the quarter, we also experienced an increase in transportation costs and incentive compensation levels versus the prior year. In total, these 2 items represented a $1.3 million differential versus last year's first quarter.

And I mentioned a moment ago, we believe the new marketing campaign is driving qualified traffic to our stores and to our dealers. Five new commercials will be rolled out this fall, building the momentum of the campaign. For the year, our advertising spend on the Brooke Shields campaign will be approximately $3 million higher versus fiscal 2012. But because the campaign was launched in last year's third quarter, specifically in November, the additional $3 million will all be recognized in the first half of fiscal 2012.

On an annual basis, we continue to believe, with adequate volume, our upholstery segment can operate with a low double digit operating margin, reflecting our lean operating platform as we experienced in the fourth quarter when we posted a 10.3% margin.

Turning to our casegoods segments. Sales for the quarter declined 7.4% to $34 million compared with last year's first quarter when we had the very successful launch of the Nickelodeon youth collection by Lea. Lower volume levels and higher raw material and finished goods costs impacted our operating margin, which declined to 1.6%. We did institute a price increase across all of our casegoods brands late in the first quarter, which is expected to improve our profitability going forward. Although there have been quarters with sales increases over the last couple of years, in general, compared to the upholstery business, the casegoods business is more challenged in a difficult macro economic environment given the higher-priced nature of wood and room groupings and their replacement timeframes.

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